What is a 'Limited Purpose Trust Company'

A limited purpose trust company is a trust company that has been chartered by the state to perform specific trust functions. These functions can include acting as a depositor or safe-keeper for securities or mortgages. The Participants Trust Company is an example of a mortgage depositor trust.

BREAKING DOWN 'Limited Purpose Trust Company'

The Depository Trust Company (DTC) in New York is another example of a limited purpose trust company. It was established in 1973 to hold securities in safekeeping for banks and investment firms. This allows them to make book-entry settlements on their trades, as well as reducing costs associated with trading, and allowing for more efficient clearing and settlement of securities transactions. The DTC retains custody of over 1.3 million active securities issues, which are worth $54.2 trillion as of July 2017, and which are based in more than 131 territories and countries, including the U.S.

Powers of a Limited Purpose Trust Company

The powers granted to a limited purpose trust company may vary depending on the state in which the trust company is chartered. In New York, limited purpose trust companies do not have the power to make loans or accept deposits, for example; however, there may be some limited circumstances under which a limited purpose trust company would have this power, if the loan or deposit were necessary for the trust to exercise its other fiduciary powers.

Any restrictions imposed on the operation of a specific limited purpose trust company will be specified in its organization certificate. An organization certificate does not specify the types of business in which the limited purpose trust may engage, but the trust company must agree to stick to a specific type of business in order to be granted its charter. The character of this business must be stated in the organization’s application to be chartered as a limited purpose trust company, and it cannot be changed without permission from the state’s Superintendent of Financial Services.

Limited Purpose Trust Companies as a Regulatory Solution

In states like New York, some fintech companies are using the limited purpose trust charter as a way to get around regulatory requirements. For example, the virtual currency exchange companies Gemini and itBit have obtained limited purpose trust company charters in New York, in order to avoid the need to get licensed as money transmitters, and to maintain the higher capital requirements of such a license. However, such a solution does not allow the companies to operate out of the state in which they are chartered without further licensing or charters.

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